So you're finally ready to knuckle-down and do your taxes. You've got the forms you need, your wage or salary statement, and that shoebox full of receipts and other notes you collected throughout 2018. The sooner you get this done, the sooner you can get that big refund you're expecting, right?
Well, you might be in for some surprises. The new state tax law that took effect last year means you'll have a lower income tax rate, but it also means some expenses you used to write off are no longer deductible.
To make sense of the changes, KET convened a panel of state revenue officials to explain key aspects of the new tax law and answer viewer questions. The guests were Kentucky Department of Revenue Commissioner Daniel Bork; Richard Dobson, executive director of the Office of Sales and Excise Tax; and Christy Kinney, director of the Office of Income Taxation.
Individual Income Tax Overview
The state tax reforms passed by the 2018 General Assembly became law last April, so this will be the first time Kentuckians will file under the new rules. House Bill 487 replaced the individual tax brackets with a single 5 percent tax rate. Previously Kentucky had tiered brackets of 5, 5.8 and 6 percent, according to Christy Kinney.
To offset the flat tax rate, lawmakers eliminated a number of individual deductions, including those for health insurance coverage and medical expenses.
“In the past, we had a pretty generous deduction for health insurance if you paid with after-tax dollars,” says Kinney. “But with House Bill 487, it eliminated the deduction for health insurance premiums and long-term care insurance premiums.”
Also gone are deductions for casualty and theft losses, local income taxes, real estate property tax, and gambling losses. Kinney says the primary deductions that remain are for home mortgage interest and charitable contributions.
Although there are fewer options for itemized deductions, the standard deduction remains at $2,530.
The new law reduces the pension income exclusion from $41,110 to $31,110. However, Kinney says federal, state and local government as well as military retirees who earned their pensions prior to Jan. 1, 1998, can still exempt the full amount of their pension benefits. Those who retired after that date can exempt a percentage of their pension income. Kinney says a Schedule P worksheet to calculate that percentage will be posted on the Revenue Department's website, revenue.ky.gov, within the next week.
Income from Social Security and disability payments remain fully exempt for Kentucky tax purposes, regardless of the age of the recipient.
Questions and Answers
Always consult with state revenue officials or an accounting professional regarding specific questions you have about your personal or business tax obligations. Here are some questions asked by KET viewers.
Does everyone have to file state income taxes?
Kinney says people who only have Social Security income are not required to file in Kentucky. Individuals and families with earnings below the federal poverty level may also be exempt from filing. Even if you think you do not owe any taxes, she says you still have to file so that you can collect any refund that may be due to you.
Where can I get state tax forms?
All forms are available online at revenue.ky.gov. The Department of Revenue will mail paper forms to individuals who request them by calling (502) 564-3658, or by completing a requisition form.
Do I need to include wage and salary documents when I file?
Kinney says you do not have to attach a W-2 or 1099 form to your tax filing as long as you document the wage and withholding information on the state's Schedule KW-2. However you should still keep your W-2 or 1099 documents in case revenue officials request a paper copy of them.
If I draw a Kentucky public pension and I move out of state, do I have still have to pay Kentucky taxes on my retirement?
No. Your retirement income is only taxable in the commonwealth as long as you live here. Once you move, it would be taxed by your new state of residence.
Is interest on a home equity line of credit still deductible?
Yes, if it is used to substantially improve your primary home.
Are worker's compensation payments taxable in Kentucky?
Does the state have a special rate for capital gains?
No. Capital gains earnings for individuals are taxed at the standard 5 percent rate.
Does each spouse in a household get a pension exclusion or are their earnings combined for one exclusion?
Each spouse can exclude the first $31,100 of their individual retirement earnings.
Can I deduct unreimbursed mileage I accrued on a personal vehicle for work purposes?
No. Deductions for unreimbursed employee expenses have been eliminated on both the federal and state tax forms.
Can I be fined for underpayment of estimated taxes resulting from changes to the tax law?
“If it’s due to tax-law changes or something like that that was not foreseen, we would generally waive those penalties,” says Commissioner Daniel Bork. Kinney adds that if the taxpayer owes less than $500, they would not be penalized. If a penalty is assessed, individuals can request to have it waived.
How do I get my tax refund if I don't have a bank account?
Bork says the individual may have their refund direct-deposited into the account of a friend or relative, if the tax-filer supplies the proper bank account information. Kinney says the state will also issue a Bank of America prepaid card in the amount of the refund to those who do not have a bank account.
Although the new sales tax rules have been in effect since July, revenue officials continue to get questions on the changes. HB 487 broadened the range of goods and services to which the state’s 6 percent sales tax now applies, including tickets to performances and events put on by nonprofit organizations, health club membership fees, labor on car repairs, pet care, dry cleaning, and lawn and landscaping services.
Richard Dobson says his staff has traveled the state giving dozens of presentations on the new sales taxes. They're also explaining requirements for tax collections on online sales.
“Our own instate retailers in Kentucky need to be aware of their potential liabilities as they make sales into out-of-state jurisdictions,” Dobson says. “If you’re a retailer today, you have the over-the-counter sales, but most likely you have an online platform as well.”
Dobson says a retailer is always required to collect the sales tax from the customer. The business is not allowed to absorb the tax and not collect it, he says. But there are cases where tax may be folded into the price of something, such as a ticket for an event. But he says that must be disclosed to the customer at the time of the sale.
Lawmakers in the 2019 General Assembly are considering a rollback of the some of the sales tax provisions, including a repeal the sales tax on tickets for education events sponsored by nonprofit entities.
Dobson says they may review other issues relating to nonprofits. For example, goods sold through a silent auction are taxable, but a corporate sponsorship of the overall event is not as long as the business received no benefits for their sponsorship.
Another issue involves landscaping services. If a subcontractor does work on behalf of a general landscape contractor, then the sub would charge the general for sales tax on the services he or she provided. Then the general contractor would charge the property owner sales tax again in their final bill. Dobson says he expects lawmakers to add a resale exemption for services to the tax law like the one that already exists for tangible personal property sales.
Other Tax Concerns
Bork says he does not expect any significant delays on processing individual tax filings and refunds by the federal Internal Revenue Service due to the recent partial government shutdown. He says the IRS was not scheduled to being processing individual returns until Jan. 28, the day federal employees returned to work.
Kinney says the state will begin processing individual returns on Feb. 11. She encourages people to file their taxes electronically. She says that will help speed delivery of any refunds – within two to three weeks for electronic filers, versus eight to 12 weeks for those who file by mail.
For more information on how to file state taxes, visit the websites revenue.ky.gov and taxanswers.ky.gov. To ask specific questions, you can call the Department of Revenue at (502) 564-5700 and leave a message.
To check the status of a tax refund, go to refund.ky.gov.